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The wave of populist antitrust that has been embraced by regulators and legislators in the United States, United Kingdom, European Union, and other jurisdictions rests on the assumption that currently dominant platforms occupy entrenched positions that only government intervention can dislodge. Following this view, Facebook will forever dominate social networking, Amazon will forever dominate cloud computing, Uber and Lyft will forever dominate ridesharing, and Amazon and Netflix will forever dominate streaming. This assumption of platform invincibility is so well-established that some policymakers advocate significant interventions without making any meaningful inquiry into whether a seemingly dominant platform actually exercises market power.

Yet this assumption is not supported by historical patterns in platform markets. It is true that network effects drive platform markets toward “winner-take-most” outcomes. But the winner is often toppled quickly and without much warning. There is no shortage of examples.

In 2007, a columnist in The Guardian observed that “it may already be too late for competitors to dislodge MySpace” and quoted an economist as authority for the proposition that “MySpace is well on the way to becoming … a natural monopoly.” About one year later, Facebook had overtaken MySpace “monopoly” in the social-networking market. Similarly, it was once thought that Blackberry would forever dominate the mobile-communications device market, eBay would always dominate the online e-commerce market, and AOL would always dominate the internet-service-portal market (a market that no longer even exists). The list of digital dinosaurs could go on.

All those tech leaders were challenged by entrants and descended into irrelevance (or reduced relevance, in eBay’s case). This occurred through the force of competition, not government intervention.

Why This Time is Probably Not Different

Given this long line of market precedents, current legislative and regulatory efforts to “restore” competition through extensive intervention in digital-platform markets require that we assume that “this time is different.” Just as that slogan has been repeatedly rebutted in the financial markets, so too is it likely to be rebutted in platform markets. 

There is already supporting evidence. 

In the cloud market, Amazon’s AWS now faces vigorous competition from Microsoft Azure and Google Cloud. In the streaming market, Amazon and Netflix face stiff competition from Disney+ and Apple TV+, just to name a few well-resourced rivals. In the social-networking market, Facebook now competes head-to-head with TikTok and seems to be losing. The market power once commonly attributed to leading food-delivery platforms such as Grubhub, UberEats, and DoorDash is implausible after persistent losses in most cases, and the continuous entry of new services into a rich variety of local and product-market niches.

Those who have advocated antitrust intervention on a fast-track schedule may remain unconvinced by these inconvenient facts. But the market is not. 

Investors have already recognized Netflix’s vulnerability to competition, as reflected by a 35% fall in its stock price on April 20 and a decline of more than 60% over the past 12 months. Meta, Facebook’s parent, also experienced a reappraisal, falling more than 26% on Feb. 3 and more than 35% in the past 12 months. Uber, the pioneer of the ridesharing market, has declined by almost 50% over the past 12 months, while Lyft, its principal rival, has lost more than 60% of its value. These price freefalls suggest that antitrust populists may be pursuing solutions to a problem that market forces are already starting to address.

The Forgotten Curse of the Incumbent

For some commentators, the sharp downturn in the fortunes of the so-called “Big Tech” firms would not come as a surprise.

It has long been observed by some scholars and courts that a dominant firm “carries the seeds of its own destruction”—a phrase used by then-professor and later-Judge Richard Posner, writing in the University of Chicago Law Review in 1971. The reason: a dominant firm is liable to exhibit high prices, mediocre quality, or lackluster innovation, which then invites entry by more adept challengers. However, this view has been dismissed as outdated in digital-platform markets, where incumbents are purportedly protected by network effects and switching costs that make it difficult for entrants to attract users. Depending on the set of assumptions selected by an economic modeler, each contingency is equally plausible in theory.

The plunging values of leading platforms supplies real-world evidence that favors the self-correction hypothesis. It is often overlooked that network effects can work in both directions, resulting in a precipitous fall from market leader to laggard. Once users start abandoning a dominant platform for a new competitor, network effects operating in reverse can cause a “run for the exits” that leaves the leader with little time to recover. Just ask Nokia, the world’s leading (and seemingly unbeatable) smartphone brand until the Apple iPhone came along.

Why Market Self-Correction Outperforms Regulatory Correction

Market self-correction inherently outperforms regulatory correction: it operates far more rapidly and relies on consumer preferences to reallocate market leadership—a result perfectly consistent with antitrust’s mission to preserve “competition on the merits.” In contrast, policymakers can misdiagnose the competitive effects of business practices; are susceptible to the influence of private interests (especially those that are unable to compete on the merits); and often mispredict the market’s future trajectory. For Exhibit A, see the protracted antitrust litigation by the U.S. Department against IBM, which started in 1975 and ended in withdrawal of the suit in 1982. Given the launch of the Apple II in 1977, the IBM PC in 1981, and the entry of multiple “PC clones,” the forces of creative destruction swiftly displaced IBM from market leadership in the computing industry.

Regulators and legislators around the world have emphasized the urgency of taking dramatic action to correct claimed market failures in digital environments, casting aside prudential concerns over the consequences if any such failure proves to be illusory or temporary. 

But the costs of regulatory failure can be significant and long-lasting. Markets must operate under unnecessary compliance burdens that are difficult to modify. Regulators’ enforcement resources are diverted, and businesses are barred from adopting practices that would benefit consumers. In particular, proposed breakup remedies advocated by some policymakers would undermine the scale economies that have enabled platforms to push down prices, an important consideration in a time of accelerating inflation.


The high concentration levels and certain business practices in digital-platform markets certainly raise important concerns as a matter of antitrust (as well as privacy, intellectual property, and other bodies of) law. These concerns merit scrutiny and may necessitate appropriately targeted interventions. Yet, any policy steps should be anchored in the factually grounded analysis that has characterized decades of regulatory and judicial action to implement the antitrust laws with appropriate care. Abandoning this nuanced framework for a blunt approach based on reflexive assumptions of market power is likely to undermine, rather than promote, the public interest in competitive markets.

[The ideas in this post from Truth on the Market regular Jonathan M. Barnett of USC Gould School of Law—the eighth entry in our FTC UMC Rulemaking symposiumare developed in greater detail in “Regulatory Rents: An Agency-Cost Analysis of the FTC Rulemaking Initiative,” a chapter in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year. This is the first of two posts we are publishing today; see also this related post from Aaron Nielsen of BYU Law. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In December 2021, the Federal Trade Commission (FTC) released its statement of regulatory priorities for 2022, which describes its intention to expand the agency’s rulemaking activities to target “unfair methods of competition” (UMC) under Section 5 of the Federal Trade Commission Act (FTC Act), in addition to (and in some cases, presumably in place of) the conventional mechanism of case-by-case adjudication. Agency leadership (meaning, the FTC chair and the majority commissioners) largely characterizes the rulemaking initiative as a logistical improvement to enable the agency to more efficiently execute its statutory commitment to preserve competitive markets. Unburdened by the costs and delays inherent to the adjudicative process (which, in the antitrust context, typically requires evidence of actual or likely competitive harm), the agency will be able to take expedited action against UMCs based on rules preemptively set forth by the agency. 

This shift from enforcement by adjudication to enforcement by rulemaking is far from a mechanical adjustment. Rather, it is best understood as part of an initiative to make fundamental changes to the substance and methodology of antitrust enforcement.  Substantively, the initiative appears to be part of a broader effort to alter the goals of antitrust enforcement so that it promotes what are deemed to be “equitable” market outcomes, rather than preserving the competitive process through which outcomes are determined by market forces. Methodologically, the initiative appears to be part of a broader effort to displace rule-of-reason treatment with the practical equivalent of per se prohibitions in a wide range of putatively “unfair” practices. Both steps would be inconsistent with the agency’s statutory mission to safeguard the competitive process or a meaningful commitment to a market-driven economy and the rule of law.

Abandoning Competitive Markets

Little steps sometimes portend bigger changes. 

In July 2021, FTC leadership removed the following words from the mission description of the agency’s Bureau of Competition: “The Bureau’s work aims to preserve the free market system and assure the unfettered operation of the forces of supply and demand.” This omitted statement had tracked what remains the standard characterization by federal courts and agency guidelines of the core objective of the antitrust laws. Following this characterization, the antitrust laws seek to preserve the “rules of the game” for market competition, while remaining indifferent to the outcomes of such competition in any particular market. It is the competitive process, not the fortunes of particular competitors, that matters.

Other statements by FTC leadership suggest that they seek to abandon this outcome-agnostic perspective. A memo from the FTC chair to staff, distributed in September 2021, states that the agency’s actions “shape the distribution of power and opportunity” and encourages staff “to take a holistic approach to identifying harms, recognizing that antitrust and consumer protection violations harm workers and independent businesses as well as consumers.” In a draft strategic plan distributed by FTC leadership in October 2021, the agency described its mission as promoting “fair competition” for the “benefit of the public.”  In contrast, the agency’s previously released strategic plan had described the agency’s mission as promoting “competition” for the benefit of consumers, consistent with the case law’s commitment to protecting consumer welfare, dating at least to the Supreme Court’s 1979 decision in Reiter v. Sonotone Corp. et al. The change in language suggests that the agency’s objectives encompass a broad range of stakeholders and policies (including distributive objectives) that extends beyond, and could conflict with, its commitment to preserve the integrity of the competitive process.

These little steps are part of a broader package of “big steps” undertaken during 2021 by FTC leadership. 

In July 2021, the agency abandoned decades of federal case law and agency guidelines by rejecting the consumer-welfare standard for purposes of enforcement of Section 5 of the FTC Act against UMCs. Relatedly, FTC leadership asserted in the same statement that Congress had delegated to the agency authority under Section 5 “to determine which practices fell into the category of ‘unfair methods of competition’”. Remarkably, the agency’s claimed ambit of prosecutorial discretion to identify “unfair” practices is apparently only limited by a commitment to exercise such power “responsibly.”

This largely unbounded redefinition of the scope of Section 5 divorces the FTC’s enforcement authority from the concepts and methods as embodied in decades of federal case law and agency guidelines interpreting the Sherman and Clayton Acts. Those concepts and methods are in turn anchored in the consumer-welfare principle, which ensures that regulatory and judicial actions promote the public interest in the competitive process, rather than the private interests of any particular competitor or other policy goals not contemplated by the antitrust laws. Effectively, agency leadership has unilaterally converted Section 5 into an empty vessel into which enforcers may insert a fluid range of business practices that are deemed by fiat to pose a risk to “fair” competition. 

Abandoning the Rule of Reason

In the same statement in which FTC leadership rejected the consumer-welfare principle for purposes of Section 5 enforcement, it rejected the relevance of the rule of reason for these same purposes. In that statement, agency leadership castigated the rule of reason as a standard that “leads to soaring enforcement costs” and asserted that it is incompatible with Section 5 of the FTC Act. In March 2021 remarks delivered to the House Judiciary Committee’s Antitrust Subcommittee, Commissioner Rebecca Kelly Slaughter similarly lamented “[t]he effect of cramped case law,” specifically viewing as problematic the fact that “[u]nder current Section 5 jurisprudence, courts have to consider conduct under the ‘rule of reason,’ a fact-intensive investigation into whether the anticompetitive effects of the conduct outweigh the procompetitive justifications.” Hence, it appears that the FTC, in exercising its purported rulemaking powers against UMCs under Section 5, does not intend to undertake the balancing of competitive harms and gains that is the signature element of rule-of-reason analysis. Tellingly, the agency’s draft strategic plan, released in October 2021, omits language that it would execute its enforcement mission “without unduly burdening legitimate business activity” (language that had appeared in the previously released strategic plan)—again, suggesting that it plans to take littleaccount of the offsetting competitive gains attributable to a particular business practice.

This change in methodology has two profound and concerning implications. 

First, it means that any “unfair” practice targeted by the agency under Section 5 is effectively subject to a per se prohibition—that is, the agency can prevail merely by identifying that the defendant engaged in a particular practice, rather than having to show competitive harm. Note that this would represent a significant step beyond the per se rule that Sherman Act case law applies to certain cases of horizontal collusion. In those cases, a per se rule has been adopted because economic analysis indicates that these types of practices in general pose such a high risk of net anticompetitive harm that a rule-of-reason inquiry is likely to fail a cost-benefit test almost all of the time. By contrast, there is no indication that FTC leadership plans to confine its rulemaking activities to practices that systematically pose an especially high risk of anticompetitive harm, in part because it is not clear that agency leadership still views harm to the competitive process as being the determinative criterion in antitrust analysis.  

Second, without further clarification from agency leadership, this means that the agency appears to place substantially reduced weight on the possibility of “false positive” error costs. This would be a dramatic departure from the conventional approach to error costs as reflected in federal antitrust case law. Antitrust scholars have long argued, and many courts have adopted the view, that “false positive” costs should be weighted more heavily relative to “false negative” error costs, principally on the ground that, as Judge Richard Posner once put it, “a cartel . . . carries within it the seeds of its own destruction.” To be clear, this weighted approach should still meaningfully assess the false-negative error costs that arise from mistaken failures to intervene. By contrast, the agency’s blanket rejection of the rule of reason in all circumstances for Section 5 purposes raises doubt as to whether it would assign any material weight to false-positive error costs in exercising its purported rulemaking power under Section 5 against UMCs. Consistent with this possibility, the agency’s July 2021 statement—which rejected the rule of reason specifically—adopted the view that Section 5 enforcement should target business practices in their “incipiency,” even absent evidence of a “likely” anticompetitive effect.

While there may be reasonable arguments in favor of an equal weighting of false-positive and false-negative error costs (on the grounds that markets are sometimes slow to correct anticompetitive conduct, as compared to the speed with which courts correct false-positive interventions), it is hard to fathom a reasonable policy argument in favor of placing no material weight on the former cost category. Under conditions of uncertainty, the net economic effect of any particular enforcement action, or failure to take such action, gives rise to a mix of probability-adjusted false-positive and false-negative error costs. Hence, any sound policy framework seeks to minimize the sum of those costs. Moreover, the wholesale rejection of a balancing analysis overlooks extensive scholarship identifying cases in which federal courts, especially during the period prior to the Supreme Court’s landmark 1977 decision in Continental TV Inc. v. GTE Sylvania Inc., applied per se rules that erroneously targeted business practices that were almost certainly generating net-positive competitive gains. Any such mistaken intervention counterproductively penalizes the efforts and ingenuity of the most efficient firms, which then harms consumers, who are compelled to suffer higher prices, lower quality, or fewer innovations than would otherwise have been the case.

The dismissal of efficiency considerations and false-positive error costs is difficult to reconcile with an economically informed approach that seeks to take enforcement actions only where there is a high likelihood of improving economic welfare based on available evidence. On this point, it is worth quoting Oliver Williamson’s well-known critique of 1960s-era antitrust: “[I]f neither the courts nor the enforcement agencies are sensitive to these [efficiency] considerations, the system fails to meet a basic test of economic rationality. And without this the whole enforcement system lacks defensible standards and becomes suspect.”

Abandoning the Rule of Law

In a liberal democratic system of government, the market relies on the state’s commitment to set forth governing laws with adequate notice and specificity, and then to enforce those laws in a manner that is reasonably amenable to judicial challenge in case of prosecutorial error or malfeasance. Without that commitment, investors are exposed to arbitrary enforcement and would be reluctant to place capital at stake. In light of the agency’s concurrent rejection of the consumer-welfare and rule-of-reason principles, any future attempt by the FTC to exercise its purported Section 5 rulemaking powers against UMCs under what currently appears to be a regime of largely unbounded regulatory discretion is likely to violate these elementary conditions for a rule-of-law jurisdiction. 

Having dismissed decades of learning and precedent embodied in federal case law and agency guidelines, FTC leadership has declined to adopt any substitute guidelines to govern its actions under Section 5 and, instead, has stated (in its July 2021 statement rejecting the consumer-welfare principle) that there are few bounds on its authority to specify and target practices that it deems to be “unfair.” This blunt approach contrasts sharply with the measured approach reflected in existing agency guidelines and federal case law, which seek to delineate reasonably objective standards to govern enforcers’ and courts’ decision making when evaluating the competitive merits of a particular business practice.  

This approach can be observed, even if imperfectly, in the application of the Herfindahl-Hirschman Index (HHI) metric in the merger-review process and the use of “safety zones” (defined principally by reference to market-share thresholds) in the agencies’ Antitrust Guidelines for the Licensing of Intellectual Property, Horizontal Merger Guidelines, and Antitrust Guidelines for Collaborations Among Competitors. This nuanced and evidence-based approach can also be observed in a decision such as California Dental Association v. FTC (1999), which provides a framework for calibrating the intensity of a rule-of-reason inquiry based on a preliminary assessment of the likely net competitive effect of a particular practice. In making these efforts to develop reasonably objective thresholds for triggering closer scrutiny, regulators and courts have sought to reconcile the open-ended language of the offenses described in the antitrust statutes—“restraint of trade” (Sherman Act Section 1) or “monopolization” (Sherman Act Section 2)—with a meaningful commitment to providing the market with adequate notice of the inherently fuzzy boundary between competitive and anti-competitive practices in most cases (and especially, in cases involving single-firm conduct that is most likely to be targeted by the agency under its Section 5 authority). 

It does not appear that agency leadership intends to adopt this calibrated approach in implementing its rulemaking initiative, in light of its largely unbounded understanding of its Section 5 enforcement authority and wholesale rejection of the rule-of-reason methodology. If Section 5 is understood to encompass a broad and fluid set of social goals, including distributive objectives that can conflict with a commitment to the competitive process, then there is no analytical reference point by which markets can reliably assess the likelihood of antitrust liability and plan transactions accordingly. If enforcement under Section 5, including exercise of any purported rulemaking powers, does not require the agency to consider offsetting efficiencies attributable to any particular practice, then a chilling effect on everyday business activity and, more broadly, economic growth can easily ensue. In particular, firms may abstain from practices that may have mostly or even entirely procompetitive effects simply because there is some material likelihood that any such practice will be subject to investigation and enforcement under the agency’s understanding of its Section 5 authority and its adoption of a per se approach for which even strong evidence of predominantly procompetitive effects would be moot.

From Free Markets to Administered Markets

The FTC’s proposed rulemaking initiative, when placed within the context of other fundamental changes in substance and methodology adopted by agency leadership, is not easily reconciled with a market-driven economy in which resources are principally directed by the competitive forces of supply and demand. FTC leadership has reserved for the agency discretion to deem a business practice as “unfair,” while defining fairness by reference to an agglomeration of loosely described policy goals that include—but go beyond, and in some cases may conflict with—the agency’s commitment to preserve market competition. Concurrently, FTC leadership has rejected the rule-of-reason balancing approach and, by implication, may place no material weight on (or even fail to consider entirely) the efficiencies attributable to a particular business practice. 

In the aggregate, any rulemaking activity undertaken within this unstructured framework would make it challenging for firms and investors to assess whether any particular action is likely to trigger agency scrutiny. Faced with this predicament, firms could only substantially reduce exposure to antitrust liability by seeking various forms of preclearance with FTC staff, who would in turn be led to issue supplemental guidance, rules, and regulations to handle the high volume of firm inquiries. Contrary to the advertised advantages of enforcement by rulemaking, this unavoidable cycle of rule interpretation and adjustment would likely increase substantially aggregate transaction and compliance costs as compared to enforcement by adjudication. While enforcement by adjudication occurs only periodically and impacts a limited number of firms, enforcement by rulemaking is a continuous activity that impacts all firms. The ultimate result: the free play of the forces of supply and demand would be replaced by a continuously regulated environment where market outcomes are constantly being reviewed through the administrative process, rather than being worked out through the competitive process.  

This is a state of affairs substantially removed from the “free market system” to which the FTC’s Bureau of Competition had once been committed. Of course, that may be exactly what current agency leadership has in mind.

President Joe Biden’s July 2021 executive order set forth a commitment to reinvigorate U.S. innovation and competitiveness. The administration’s efforts to pass the America COMPETES Act would appear to further demonstrate a serious intent to pursue these objectives.

Yet several actions taken by federal agencies threaten to undermine the intellectual-property rights and transactional structures that have driven the exceptional performance of U.S. firms in key areas of the global innovation economy. These regulatory missteps together represent a policy “lose-lose” that lacks any sound basis in innovation economics and threatens U.S. leadership in mission-critical technology sectors.

Life Sciences: USTR Campaigns Against Intellectual-Property Rights

In the pharmaceutical sector, the administration’s signature action has been an unprecedented campaign by the Office of the U.S. Trade Representative (USTR) to block enforcement of patents and other intellectual-property rights held by companies that have broken records in the speed with which they developed and manufactured COVID-19 vaccines on a mass scale.

Patents were not an impediment in this process. To the contrary: they were necessary predicates to induce venture-capital investment in a small firm like BioNTech, which undertook drug development and then partnered with the much larger Pfizer to execute testing, production, and distribution. If success in vaccine development is rewarded with expropriation, this vital public-health sector is unlikely to attract investors in the future. 

Contrary to increasingly common assertions that the Bayh-Dole Act (which enables universities to seek patents arising from research funded by the federal government) “robs” taxpayers of intellectual property they funded, the development of Covid-19 vaccines by scientist-founded firms illustrates how the combination of patents and private capital is essential to convert academic research into life-saving medical solutions. The biotech ecosystem has long relied on patents to structure partnerships among universities, startups, and large firms. The costly path from lab to market relies on a secure property-rights infrastructure to ensure exclusivity, without which no investor would put capital at stake in what is already a high-risk, high-cost enterprise.  

This is not mere speculation. During the decades prior to the Bayh-Dole Act, the federal government placed strict limitations on the ability to patent or exclusively license innovations arising from federally funded research projects. The result: the market showed little interest in making the investment needed to convert those innovations into commercially viable products that might benefit consumers. This history casts great doubt on the wisdom of the USTR’s campaign to limit the ability of biopharmaceutical firms to maintain legal exclusivity over certain life sciences innovations.

Genomics: FTC Attempts to Block the Illumina/GRAIL Acquisition

In the genomics industry, the Federal Trade Commission (FTC) has devoted extensive resources to oppose the acquisition by Illumina—the market leader in next-generation DNA-sequencing equipment—of a medical-diagnostics startup, GRAIL (an Illumina spinoff), that has developed an early-stage cancer screening test.

It is hard to see the competitive threat. GRAIL is a pre-revenue company that operates in a novel market segment and its diagnostic test has not yet received approval from the Food and Drug Administration (FDA). To address concerns over barriers to potential competitors in this nascent market, Illumina has committed to 12-year supply contracts that would bar price increases or differential treatment for firms that develop oncology-detection tests requiring use of the Illumina platform.

One of Illumina’s few competitors in the global market is the BGI Group, a China-based company that, in 2013, acquired Complete Genomics, a U.S. target that Illumina pursued but relinquished due to anticipated resistance from the FTC in the merger-review process.  The transaction was then cleared by the Committee on Foreign Investment in the United States (CFIUS).

The FTC’s case against Illumina’s re-acquisition of GRAIL relies on theoretical predictions of consumer harm in a market that is not yet operational. Hypothetical market failure scenarios may suit an academic seminar but fall well below the probative threshold for antitrust intervention. 

Most critically, the Illumina enforcement action places at-risk a key element of well-functioning innovation ecosystems. Economies of scale and network effects lead technology markets to converge on a handful of leading platforms, which then often outsource research and development by funding and sometimes acquiring smaller firms that develop complementary technologies. This symbiotic relationship encourages entry and benefits consumers by bringing new products to market as efficiently as possible. 

If antitrust interventions based on regulatory fiat, rather than empirical analysis, disrupt settled expectations in the M&A market that innovations can be monetized through acquisition transactions by larger firms, venture capital may be unwilling to fund such startups in the first place. Independent development or an initial public offering are often not feasible exit options. It is likely that innovation will then retreat to the confines of large incumbents that can fund research internally but often execute it less effectively. 

Wireless Communications: DOJ Takes Aim at Standard-Essential Patents

Wireless communications stand at the heart of the global transition to a 5G-enabled “Internet of Things” that will transform business models and unlock efficiencies in myriad industries.  It is therefore of paramount importance that policy actions in this sector rest on a rigorous economic basis. Unfortunately, a recent policy shift proposed by the U.S. Department of Justice’s (DOJ) Antitrust Division does not meet this standard.

In December 2021, the Antitrust Division released a draft policy statement that would largely bar owners of standard-essential patents from seeking injunctions against infringers, which are usually large device manufacturers. These patents cover wireless functionalities that enable transformative solutions in myriad industries, ranging from communications to transportation to health care. A handful of U.S. and European firms lead in wireless chip design and rely on patent licensing to disseminate technology to device manufacturers and to fund billions of dollars in research and development. The result is a technology ecosystem that has enjoyed continuous innovation, widespread user adoption, and declining quality-adjusted prices.

The inability to block infringers disrupts this equilibrium by signaling to potential licensees that wireless technologies developed by others can be used at-will, with the terms of use to be negotiated through costly and protracted litigation. A no-injunction rule would discourage innovation while encouraging delaying tactics favored by well-resourced device manufacturers (including some of the world’s largest companies by market capitalization) that occupy bottleneck pathways to lucrative retail markets in the United States, China, and elsewhere.

Rather than promoting competition or innovation, the proposed policy would simply transfer wealth from firms that develop new technologies at great cost and risk to firms that prefer to use those technologies at no cost at all. This does not benefit anyone other than device manufacturers that already capture the largest portion of economic value in the smartphone supply chain.


From international trade to antitrust to patent policy, the administration’s actions imply little appreciation for the property rights and contractual infrastructure that support real-world innovation markets. In particular, the administration’s policies endanger the intellectual-property rights and monetization pathways that support market incentives to invest in the development and commercialization of transformative technologies.

This creates an inviting vacuum for strategic rivals that are vigorously pursuing leadership positions in global technology markets. In industries that stand at the heart of the knowledge economy—life sciences, genomics, and wireless communications—the administration is on a counterproductive trajectory that overlooks the business realities of technology markets and threatens to push capital away from the entrepreneurs that drive a robust innovation ecosystem. It is time to reverse course.

During the exceptional rise in stock-market valuations from March 2020 to January 2022, both equity investors and antitrust regulators have implicitly agreed that so-called “Big Tech” firms enjoyed unbeatable competitive advantages as gatekeepers with largely unmitigated power over the digital ecosystem.

Investors bid up the value of tech stocks to exceptional levels, anticipating no competitive threat to incumbent platforms. Antitrust enforcers and some legislators have exhibited belief in the same underlying assumption. In their case, it has spurred advocacy of dramatic remedies—including breaking up the Big Tech platforms—as necessary interventions to restore competition. 

Other voices in the antitrust community have been more circumspect. A key reason is the theory of contestable markets, developed in the 1980s by the late William Baumol and other economists, which holds that even extremely large market shares are at best a potential indicator of market power. To illustrate, consider the extreme case of a market occupied by a single firm. Intuitively, the firm would appear to have unqualified pricing power. Not so fast, say contestable market theorists. Suppose entry costs into the market are low and consumers can easily move to other providers. This means that the apparent monopolist will act as if the market is populated by other competitors. The takeaway: market share alone cannot demonstrate market power without evidence of sufficiently strong barriers to market entry.

While regulators and some legislators have overlooked this inconvenient principle, it appears the market has not. To illustrate, look no further than the Feb. 3 $230 billion crash in the market value of Meta Platforms—parent company of Facebook, Instagram, and WhatsApp, among other services.

In its antitrust suit against Meta, the Federal Trade Commission (FTC) has argued that Meta’s Facebook service enjoys a social-networking monopoly, a contention that the judge in the case initially rejected in June 2021 as so lacking in factual support that the suit was provisionally dismissed. The judge’s ruling (which he withdrew last month, allowing the suit to go forward after the FTC submitted a revised complaint) has been portrayed as evidence for the view that existing antitrust law sets overly demanding evidentiary standards that unfairly shelter corporate defendants. 

Yet, the record-setting single-day loss in Meta’s value suggests the evidentiary standard is set just about right and the judge’s skepticism was fully warranted. Consider one of the principal reasons behind Meta’s plunge in value: its service had suffered substantial losses of users to TikTok, a formidable rival in a social-networking market in which the FTC claims that Facebook faces no serious competition. The market begs to differ. In light of the obvious competitive threat posed by TikTok and other services, investors reassessed Facebook’s staying power, which was then reflected in its owner Meta’s downgraded stock price.

Just as the investment bubble that had supported the stock market’s case for Meta has popped, so too must the regulatory bubble that had supported the FTC’s antitrust case against it. Investors’ reevaluation rebuts the FTC’s strained market definition that had implausibly excluded TikTok as a competitor.

Even more fundamentally, the market’s assessment shows that Facebook’s users face nominal switching costs—in which case, its leadership position is contestable and the Facebook “monopoly” is not much of a monopoly. While this conclusion might seem surprising, Facebook’s vulnerability is hardly exceptional: Nokia, Blackberry, AOL, Yahoo, Netscape, and PalmPilot illustrate how often seemingly unbeatable tech leaders have been toppled with remarkable speed.

The unraveling of the FTC’s case against what would appear to be an obviously dominant platform should be a wake-up call for those policymakers who have embraced populist antitrust’s view that existing evidentiary requirements, which minimize the risk of “false positive” findings of anticompetitive conduct, should be set aside as an inconvenient obstacle to regulatory and judicial intervention. 

None of this should be interpreted to deny that concentration levels in certain digital markets raise significant antitrust concerns that merit close scrutiny. In particular, regulators have overlooked how some leading platforms have devalued intellectual-property rights in a manner that distorts technology and content markets by advantaging firms that operate integrated product and service ecosystems while disadvantaging firms that specialize in supplying the technological and creative inputs on which those ecosystems rely.  

The fundamental point is that potential risks to competition posed by any leading platform’s business practices can be assessed through rigorous fact-based application of the existing toolkit of antitrust analysis. This is critical to evaluate whether a given firm likely occupies a transitory, rather than durable, leadership position. The plunge in Meta’s stock in response to a revealed competitive threat illustrates the perils of discarding that surgical toolkit in favor of a blunt “big is bad” principle.

Contrary to what has become an increasingly common narrative in policy discussions and political commentary, the existing framework of antitrust analysis was not designed by scholars strategically acting to protect “big business.” Rather, this framework was designed and refined by scholars dedicated to rationalizing, through the rigorous application of economic principles, an incoherent body of case law that had often harmed consumers by shielding incumbents against threats posed by more efficient rivals. The legal shortcuts being pursued by antitrust populists to detour around appropriately demanding evidentiary requirements are writing a “back to the future” script that threatens to return antitrust law to that unfortunate predicament.

Over the past decade and a half, virtually every branch of the federal government has taken steps to weaken the patent system. As reflected in President Joe Biden’s July 2021 executive order, these restraints on patent enforcement are now being coupled with antitrust policies that, in large part, adopt a “big is bad” approach in place of decades of economically grounded case law and agency guidelines.

This policy bundle is nothing new. It largely replicates the innovation policies pursued during the late New Deal and the postwar decades. That historical experience suggests that a “weak-patent/strong-antitrust” approach is likely to encourage neither innovation nor competition.

The Overlooked Shortfalls of New Deal Innovation Policy

Starting in the early 1930s, the U.S. Supreme Court issued a sequence of decisions that raised obstacles to patent enforcement. The Franklin Roosevelt administration sought to take this policy a step further, advocating compulsory licensing for all patents. While Congress did not adopt this proposal, it was partially implemented as a de facto matter through antitrust enforcement. Starting in the early 1940s and continuing throughout the postwar decades, the antitrust agencies secured judicial precedents that treated a broad range of licensing practices as per se illegal. Perhaps most dramatically, the U.S. Justice Department (DOJ) secured more than 100 compulsory licensing orders against some of the nation’s largest companies. 

The rationale behind these policies was straightforward. By compelling access to incumbents’ patented technologies, courts and regulators would lower barriers to entry and competition would intensify. The postwar economy declined to comply with policymakers’ expectations. Implementation of a weak-IP/strong-antitrust innovation policy over the course of four decades yielded the opposite of its intended outcome. 

Market concentration did not diminish, turnover in market leadership was slow, and private research and development (R&D) was confined mostly to the research labs of the largest corporations (who often relied on generous infusions of federal defense funding). These tendencies are illustrated by the dramatically unequal allocation of innovation capital in the postwar economy.  As of the late 1950s, small firms represented approximately 7% of all private U.S. R&D expenditures.  Two decades later, that figure had fallen even further. By the late 1970s, patenting rates had plunged, and entrepreneurship and innovation were in a state of widely lamented decline.

Why Weak IP Raises Entry Costs and Promotes Concentration

The decline in entrepreneurial innovation under a weak-IP regime was not accidental. Rather, this outcome can be derived logically from the economics of information markets.

Without secure IP rights to establish exclusivity, engage securely with business partners, and deter imitators, potential innovator-entrepreneurs had little hope to obtain funding from investors. In contrast, incumbents could fund R&D internally (or with federal funds that flowed mostly to the largest computing, communications, and aerospace firms) and, even under a weak-IP regime, were protected by difficult-to-match production and distribution efficiencies. As a result, R&D mostly took place inside the closed ecosystems maintained by incumbents such as AT&T, IBM, and GE.

Paradoxically, the antitrust campaign against patent “monopolies” most likely raised entry barriers and promoted industry concentration by removing a critical tool that smaller firms might have used to challenge incumbents that could outperform on every competitive parameter except innovation. While the large corporate labs of the postwar era are rightly credited with technological breakthroughs, incumbents such as AT&T were often slow in transforming breakthroughs in basic research into commercially viable products and services for consumers. Without an immediate competitive threat, there was no rush to do so. 

Back to the Future: Innovation Policy in the New New Deal

Policymakers are now at work reassembling almost the exact same policy bundle that ended in the innovation malaise of the 1970s, accompanied by a similar reliance on public R&D funding disbursed through administrative processes. However well-intentioned, these processes are inherently exposed to political distortions that are absent in an innovation environment that relies mostly on private R&D funding governed by price signals. 

This policy bundle has emerged incrementally since approximately the mid-2000s, through a sequence of complementary actions by every branch of the federal government.

  • In 2011, Congress enacted the America Invents Act, which enables any party to challenge the validity of an issued patent through the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeals Board (PTAB). Since PTAB’s establishment, large information-technology companies that advocated for the act have been among the leading challengers.
  • In May 2021, the Office of the U.S. Trade Representative (USTR) declared its support for a worldwide suspension of IP protections over Covid-19-related innovations (rather than adopting the more nuanced approach of preserving patent protections and expanding funding to accelerate vaccine distribution).  
  • President Biden’s July 2021 executive order states that “the Attorney General and the Secretary of Commerce are encouraged to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Commitments.” This suggests that the administration has already determined to retract or significantly modify the 2019 joint policy statement in which the DOJ, USPTO, and the National Institutes of Standards and Technology (NIST) had rejected the view that standard-essential patent owners posed a high risk of patent holdup, which would therefore justify special limitations on enforcement and licensing activities.

The history of U.S. technology markets and policies casts great doubt on the wisdom of this weak-IP policy trajectory. The repeated devaluation of IP rights is likely to be a “lose-lose” approach that does little to promote competition, while endangering the incentive and transactional structures that sustain robust innovation ecosystems. A weak-IP regime is particularly likely to disadvantage smaller firms in biotech, medical devices, and certain information-technology segments that rely on patents to secure funding from venture capital and to partner with larger firms that can accelerate progress toward market release. The BioNTech/Pfizer alliance in the production and distribution of a Covid-19 vaccine illustrates how patents can enable such partnerships to accelerate market release.  

The innovative contribution of BioNTech is hardly a one-off occurrence. The restoration of robust patent protection in the early 1980s was followed by a sharp increase in the percentage of private R&D expenditures attributable to small firms, which jumped from about 5% as of 1980 to 21% by 1992. This contrasts sharply with the unequal allocation of R&D activities during the postwar period.

Remarkably, the resurgence of small-firm innovation following the strong-IP policy shift, starting in the late 20th century, mimics tendencies observed during the late 19th and early-20th centuries, when U.S. courts provided a hospitable venue for patent enforcement; there were few antitrust constraints on licensing activities; and innovation was often led by small firms in partnership with outside investors. This historical pattern, encompassing more than a century of U.S. technology markets, strongly suggests that strengthening IP rights tends to yield a policy “win-win” that bolsters both innovative and competitive intensity. 

An Alternate Path: ‘Bottom-Up’ Innovation Policy

To be clear, the alternative to the policy bundle of weak-IP/strong antitrust does not consist of a simple reversion to blind enforcement of patents and lax administration of the antitrust laws. A nuanced innovation policy would couple modern antitrust’s commitment to evidence-based enforcement—which, in particular cases, supports vigorous intervention—with a renewed commitment to protecting IP rights for innovator-entrepreneurs. That would promote competition from the “bottom up” by bolstering maverick innovators who are well-positioned to challenge (or sometimes partner with) incumbents and maintaining the self-starting engine of creative disruption that has repeatedly driven entrepreneurial innovation environments. Tellingly, technology incumbents have often been among the leading advocates for limiting patent and copyright protections.  

Advocates of a weak-patent/strong-antitrust policy believe it will enhance competitive and innovative intensity in technology markets. History suggests that this combination is likely to produce the opposite outcome.  

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law. This post is based on the author’s recent publications, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford University Press 2021) and “The Great Patent Grab,” in Battles Over Patents: History and the Politics of Innovation (eds. Stephen H. Haber and Naomi R. Lamoreaux, Oxford University Press 2021).

Advocates of legislative action to “reform” antitrust law have already pointed to the U.S. District Court for the District of Columbia’s dismissal of the state attorneys general’s case and the “conditional” dismissal of the Federal Trade Commission’s case against Facebook as evidence that federal antitrust case law is lax and demands correction. In fact, the court’s decisions support the opposite implication. 

The Risks of Antitrust by Anecdote

The failure of a well-resourced federal regulator, and more than 45 state attorney-general offices, to avoid dismissal at an early stage of the litigation testifies to the dangers posed by a conclusory approach toward antitrust enforcement that seeks to unravel acquisitions consummated almost a decade ago without even demonstrating the factual predicates to support consideration of such far-reaching interventions. The dangers to the rule of law are self-evident. Irrespective of one’s views on the appropriate direction of antitrust law, this shortcut approach would substitute prosecutorial fiat, ideological predilection, and popular sentiment for decades of case law and agency guidelines grounded in the rigorous consideration of potential evidence of competitive harm. 

The paucity of empirical support for the exceptional remedial action sought by the FTC is notable. As the district court observed, there was little systematic effort made to define the economically relevant market or provide objective evidence of market power, beyond the assertion that Facebook has a market share of “in excess of 60%.” Remarkably, the denominator behind that 60%-plus assertion is not precisely defined, since the FTC’s brief does not supply any clear metric by which to measure market share. As the court pointed out, this is a nontrivial task in multi-sided environments in which one side of the potentially relevant market delivers services to users at no charge.  

While the point may seem uncontroversial, it is important to re-appreciate why insisting on a rigorous demonstration of market power is critical to preserving a coherent body of law that provides the market with a basis for reasonably anticipating the likelihood of antitrust intervention. At least since the late 1970s, courts have recognized that “big is not always bad” and can often yield cost savings that ultimately redound to consumers’ benefit. That is: firm size and consumer welfare do not stand in inherent opposition. If courts were to abandon safeguards against suits that cannot sufficiently define the relevant market and plausibly show market power, antitrust litigation could easily be used as a tool to punish successful firms that prevail over competitors simply by being more efficient. In other words: antitrust law could become a tool to preserve competitor welfare at the expense of consumer welfare.

The Specter of No-Fault Antitrust Liability

The absence of any specific demonstration of market power suggests deficient lawyering or the inability to gather supporting evidence. Giving the FTC litigation team the benefit of the doubt, the latter becomes the stronger possibility. If that is the case, this implies an effort to persuade courts to adopt a de facto rule of per se illegality for any firm that achieves a certain market share. (The same concept lies behind legislative proposals to bar acquisitions for firms that cross a certain revenue or market capitalization threshold.) Effectively, any firm that reached a certain size would operate under the presumption that it has market power and has secured or maintained such power due to anticompetitive practices, rather than business prowess. This would effectively convert leading digital platforms into quasi-public utilities subject to continuous regulatory intervention. Such an approach runs counter to antitrust law’s mission to preserve, rather than displace, private ordering by market forces.  

Even at the high-water point of post-World War II antitrust zealotry (a period that ultimately ended in economic malaise), proposals to adopt a rule of no-fault liability for alleged monopolization were rejected. This was for good reason. Any such rule would likely injure consumers by precluding them from enjoying the cost savings that result from the “sweet spot” scenario in which the scale and scope economies of large firms are combined with sufficiently competitive conditions to yield reduced prices and increased convenience for consumers. Additionally, any such rule would eliminate incumbents’ incentives to work harder to offer consumers reduced prices and increased convenience, since any market share preserved or acquired as a result would simply invite antitrust scrutiny as a reward.

Remembering Why Market Power Matters

To be clear, this is not to say that “Big Tech” does not deserve close antitrust scrutiny, does not wield market power in certain segments, or has not potentially engaged in anticompetitive practices.  The fundamental point is that assertions of market power and anticompetitive conduct must be demonstrated, rather than being assumed or “proved” based largely on suggestive anecdotes.  

Perhaps market power will be shown sufficiently in Facebook’s case if the FTC elects to respond to the court’s invitation to resubmit its brief with a plausible definition of the relevant market and indication of market power at this stage of the litigation. If that threshold is satisfied, then thorough consideration of the allegedly anticompetitive effect of Facebook’s WhatsApp and Instagram acquisitions may be merited. However, given the policy interest in preserving the market’s confidence in relying on the merger-review process under the Hart-Scott-Rodino Act, the burden of proof on the government should be appropriately enhanced to reflect the significant time that has elapsed since regulatory decisions not to intervene in those transactions.  

It would once have seemed mundane to reiterate that market power must be reasonably demonstrated to support a monopolization claim that could lead to a major divestiture remedy. Given the populist thinking that now leads much of the legislative and regulatory discussion on antitrust policy, it is imperative to reiterate the rationale behind this elementary principle. 

This principle reflects the fact that, outside collusion scenarios, antitrust law is typically engaged in a complex exercise to balance the advantages of scale against the risks of anticompetitive conduct. At its best, antitrust law weighs competing facts in a good faith effort to assess the net competitive harm posed by a particular practice. While this exercise can be challenging in digital markets that naturally converge upon a handful of leading platforms or multi-dimensional markets that can have offsetting pro- and anti-competitive effects, these are not reasons to treat such an exercise as an anachronistic nuisance. Antitrust cases are inherently challenging and proposed reforms to make them easier to win are likely to endanger, rather than preserve, competitive markets.

Image by Gerd Altmann from Pixabay

AT&T’s $102 billion acquisition of Time Warner in 2019 will go down in M&A history as an exceptionally ill-advised transaction, resulting in the loss of tens of billions of dollars of shareholder value. It should also go down in history as an exceptional ill-chosen target of antitrust intervention.  The U.S. Department of Justice, with support from many academic and policy commentators, asserted with confidence that the vertical combination of these content and distribution powerhouses would result in an entity that could exercise market power to the detriment of competitors and consumers.

The chorus of condemnation continued with vigor even after the DOJ’s loss in court and AT&T’s consummation of the transaction. With AT&T’s May 17 announcement that it will unwind the two-year-old acquisition and therefore abandon its strategy to integrate content and distribution, it is clear these predictions of impending market dominance were unfounded. 

This widely shared overstatement of antitrust risk derives from a simple but fundamental error: regulators and commentators were looking at the wrong market.  

The DOJ’s Antitrust Case against the Transaction

The business case for the AT&T/Time Warner transaction was straightforward: it promised to generate synergies by combining a leading provider of wireless, broadband, and satellite television services with a leading supplier of video content. The DOJ’s antitrust case against the transaction was similarly straightforward: the combined entity would have the ability to foreclose “must have” content from other “pay TV” (cable and satellite television) distributors, resulting in adverse competitive effects. 

This foreclosure strategy was expected to take two principal forms. First, AT&T could temporarily withhold (or threaten to withhold) content from rival distributors absent payment of a higher carriage fee, which would then translate into higher fees for subscribers. Second, AT&T could permanently withhold content from rival distributors, who would then lose subscribers to AT&T’s DirectTV satellite television service, further enhancing AT&T’s market power. 

Many commentators, both in the trade press and significant portions of the scholarly community, characterized the transaction as posing a high-risk threat to competitive conditions in the pay TV market. These assertions reflected the view that the new entity would exercise a bottleneck position over video-content distribution in the pay TV market and would exercise that power to impose one-sided terms to the detriment of content distributors and consumers. 

Notwithstanding this bevy of endorsements, the DOJ’s case was rejected by the district court and the decision was upheld by the D.C. appellate court. The district judge concluded that the DOJ had failed to show that the combined entity would exercise any credible threat to withhold “must have” content from distributors. A key reason: the lost carriage fees AT&T would incur if it did withhold content were so high, and the migration of subscribers from rival pay TV services so speculative, that it would represent an obviously irrational business strategy. In short: no sophisticated business party would ever take AT&T’s foreclosure threat seriously, in which case the DOJ’s predictions of market power were insufficiently compelling to justify the use of government power to block the transaction.

The Fundamental Flaws in the DOJ’s Antitrust Case

The logical and factual infirmities of the DOJ’s foreclosure hypothesis have been extensively and ably covered elsewhere and I will not repeat that analysis. Following up on my previous TOTM commentary on the transaction, I would like to emphasize the point that the DOJ’s case against the transaction was flawed from the outset for two more fundamental reasons. 

False Assumption #1

The assumption that the combined entity could withhold so-called “must have” content to cause significant and lasting competitive injury to rival distributors flies in the face of market realities.  Content is an abundant, renewable, and mobile resource. There are few entry barriers to the content industry: a commercially promising idea will likely attract capital, which will in turn secure the necessary equipment and personnel for production purposes. Any rival distributor can access a rich menu of valuable content from a plethora of sources, both domestically and worldwide, each of which can provide new content, as required. Even if the combined entity held a license to distribute purportedly “must have” content, that content would be up for sale (more precisely, re-licensing) to the highest bidder as soon as the applicable contract term expired. This is not mere theorizing: it is a widely recognized feature of the entertainment industry.

False Assumption #2

Even assuming the combined entity could wield a portfolio of “must have” content to secure a dominant position in the pay TV market and raise content acquisition costs for rival pay TV services, it still would lack any meaningful pricing power in the relevant consumer market. The reason: significant portions of the viewing population do not want any pay TV or only want dramatically “slimmed-down” packages. Instead, viewers increasingly consume content primarily through video-streaming services—a market in which platforms such as Amazon and Netflix already enjoyed leading positions at the time of the transaction. Hence, even accepting the DOJ’s theory that the combined entity could somehow monopolize the pay TV market consisting of cable and satellite television services, the theory still fails to show any reasonable expectation of anticompetitive effects in the broader and economically relevant market comprising pay TV and streaming services.  Any attempt to exercise pricing power in the pay TV market would be economically self-defeating, since it would likely prompt a significant portion of consumers to switch to (or start to only use) streaming services.

The Antitrust Case for the Transaction

When properly situated within the market that was actually being targeted in the AT&T/Time Warner acquisition, the combined entity posed little credible threat of exercising pricing power. To the contrary, the combined entity was best understood as an entrant that sought to challenge the two pioneer entities—Amazon and Netflix—in the “over the top” content market.

Each of these incumbent platforms individually had (and have) multi-billion-dollar content production budgets that rival or exceed the budgets of major Hollywood studios and enjoy worldwide subscriber bases numbering in the hundreds of millions. If that’s not enough, AT&T was not the only entity that observed the displacement of pay TV by streaming services, as illustrated by the roughly concurrent entry of Disney’s Disney+ service, Apple’s Apple TV+ service, Comcast NBCUniversal’s Peacock service, and others. Both the existing and new competitors are formidable entities operating in a market with formidable capital requirements. In 2019, Netflix, Amazon, and Apple TV expended approximately $15 billion, $6 billion, and again, $6 billion, respectively, on content; by contrast, HBO Max, AT&T’s streaming service, expended approximately $3.5 billion. 

In short, the combined entity faced stiff competition from existing and reasonably anticipated competitors, requiring several billions of dollars on “content spend” to even stay in the running. Far from being able to exercise pricing power in an imaginary market defined by DOJ litigators for strategic purposes, the AT&T/Time Warner entity faced the challenge of merely surviving in a real-world market populated by several exceptionally well-financed competitors. At best, the combined entity “threatened” to deliver incremental competitive benefits by adding a robust new platform to the video-streaming market; at worst, it would fail in this objective and cause no incremental competitive harm. As it turns out, the latter appears to be the case.

The Enduring Virtues of Antitrust Prudence

AT&T’s M&A fiasco has important lessons for broader antitrust debates about the evidentiary standards that should be applied by courts and agencies when assessing alleged antitrust violations, in general, and vertical restraints, in particular.  

Among some scholars, regulators, and legislators, it has become increasingly received wisdom that prevailing evidentiary standards, as reflected in federal case law and agency guidelines, are excessively demanding, and have purportedly induced chronic underenforcement. It has been widely asserted that the courts’ and regulators’ focus on avoiding “false positives” and the associated costs of disrupting innocuous or beneficial business practices has resulted in an overly cautious enforcement posture, especially with respect to mergers and vertical restraints.

In fact, these views were expressed by some commentators in endorsing the antitrust case against the AT&T/Time-Warner transaction. Some legislators have gone further and argued for substantial amendments to the antitrust law to provide enforcers and courts with greater latitude to block or re-engineer combinations that would not pose sufficiently demonstrated competitive risks under current statutory or case law.

The swift downfall of the AT&T/Time-Warner transaction casts great doubt on this critique and accompanying policy proposals. It was precisely the district court’s rigorous application of those “overly” demanding evidentiary standards that avoided what would have been a clear false-positive error. The failure of the “blockbuster” combination to achieve not only market dominance, but even reasonably successful entry, validates the wisdom of retaining those standards.

The fundamental mismatch between the widely supported antitrust case against the transaction and the widely overlooked business realities of the economically relevant consumer market illustrates the ease with which largely theoretical and decontextualized economic models of competitive harm can lead to enforcement actions that lack any reasonable basis in fact.   

In current discussions of technology markets, few words are heard more often than “platform.” Initial public offering (IPO) prospectuses use “platform” to describe a service that is bound to dominate a digital market. Antitrust regulators use “platform” to describe a service that dominates a digital market or threatens to do so. In either case, “platform” denotes power over price. For investors, that implies exceptional profits; for regulators, that implies competitive harm.

Conventional wisdom holds that platforms enjoy high market shares, protected by high barriers to entry, which yield high returns. This simple logic drives the market’s attribution of dramatically high valuations to dramatically unprofitable businesses and regulators’ eagerness to intervene in digital platform markets characterized by declining prices, increased convenience, and expanded variety, often at zero out-of-pocket cost. In both cases, “burning cash” today is understood as the path to market dominance and the ability to extract a premium from consumers in the future.

This logic is usually wrong. 

The Overlooked Basics of Platform Economics

To appreciate this perhaps surprising point, it is necessary to go back to the increasingly overlooked basics of platform economics. A platform can refer to any service that matches two complementary populations. A search engine matches advertisers with consumers, an online music service matches performers and labels with listeners, and a food-delivery service matches restaurants with home diners. A platform benefits everyone by facilitating transactions that otherwise might never have occurred.

A platform’s economic value derives from its ability to lower transaction costs by funneling a multitude of individual transactions into a single convenient hub.  In pursuit of minimum costs and maximum gains, users on one side of the platform will tend to favor the most popular platforms that offer the largest number of users on the other side of the platform. (There are partial exceptions to this rule when users value being matched with certain typesof other users, rather than just with more users.) These “network effects” mean that any successful platform market will always converge toward a handful of winners. This positive feedback effect drives investors’ exuberance and regulators’ concerns.

There is a critical point, however, that often seems to be overlooked.

Market share only translates into market power to the extent the incumbent is protected against entry within some reasonable time horizon.  If Warren Buffett’s moat requirement is not met, market share is immaterial. If owns 100% of the online pet food delivery market but entry costs are asymptotic, then market power is negligible. There is another important limiting principle. In platform markets, the depth of the moat depends not only on competitors’ costs to enter the market, but users’ costs in switching from one platform to another or alternating between multiple platforms. If users can easily hop across platforms, then market share cannot confer market power given the continuous threat of user defection. Put differently: churn limits power over price.

Contrary to natural intuitions, this is why a platform market consisting of only a few leaders can still be intensely competitive, keeping prices low (down to and including $0) even if the number of competitors is low. It is often asserted, however, that users are typically locked into the dominant platform and therefore face high switching costs, which therefore implicitly satisfies the moat requirement. If that is true, then the “high churn” scenario is a theoretical curiosity and a leading platform’s high market share would be a reliable signal of market power. In fact, this common assumption likely describes the atypical case. 

AWS and the Cloud Data-Storage Market

This point can be illustrated by considering the cloud data-storage market. This would appear to be an easy case where high switching costs (due to the difficulty in shifting data among storage providers) insulate the market leader against entry threats. Yet the real world does not conform to these expectations. 

While Amazon Web Services pioneered the $100 billion-plus market and is still the clear market leader, it now faces vigorous competition from Microsoft Azure, Google Cloud, and other data-storage or other cloud-related services. This may reflect the fact that the data storage market is far from saturated, so new users are up for grabs and existing customers can mitigate lock-in by diversifying across multiple storage providers. Or it may reflect the fact that the market’s structure is fluid as a function of technological changes, enabling entry at formerly bundled portions of the cloud data-services package. While it is not always technologically feasible, the cloud storage market suggests that users’ resistance to platform capture can represent a competitive opportunity for entrants to challenge dominant vendors on price, quality, and innovation parameters.

The Surprising Instability of Platform Dominance

The instability of leadership positions in the cloud storage market is not exceptional. 

Consider a handful of once-powerful platforms that were rapidly dethroned once challenged by a more efficient or innovative rival: Yahoo and Alta Vista in the search-engine market (displaced by Google); Netscape in the browser market (displaced by Microsoft’s Internet Explorer, then displaced by Google Chrome); Nokia and then BlackBerry in the mobile wireless-device market (displaced by Apple and Samsung); and Friendster in the social-networking market (displaced by Myspace, then displaced by Facebook). AOL was once thought to be indomitable; now it is mostly referenced as a vintage email address. The list could go on.

Overestimating platform dominance—or more precisely, assuming platform dominance without close factual inquiry—matters because it promotes overestimates of market power. That, in turn, cultivates both market and regulatory bubbles: investors inflate stock valuations while regulators inflate the risk of competitive harm. 

DoorDash and the Food-Delivery Services Market

Consider the DoorDash IPO that launched in early December 2020. The market’s current approximately $50 billion valuation of a business that has been almost consistently unprofitable implicitly assumes that DoorDash will maintain and expand its position as the largest U.S. food-delivery platform, which will then yield power over price and exceptional returns for investors. 

There are reasons to be skeptical. Even where DoorDash captures and holds a dominant market share in certain metropolitan areas, it still faces actual and potential competition from other food-delivery services, in-house delivery services (especially by well-resourced national chains), and grocery and other delivery services already offered by regional and national providers. There is already evidence of these expected responses to DoorDash’s perceived high delivery fees, a classic illustration of the disciplinary effect of competitive forces on the pricing choices of an apparently dominant market leader. These “supply-side” constraints imposed by competitors are compounded by “demand-side” constraints imposed by customers. Home diners incur no more than minimal costs when swiping across food-delivery icons on a smartphone interface, casting doubt that high market share is likely to translate in this context into market power.

Deliveroo and the Costs of Regulatory Autopilot

Just as the stock market can suffer from delusions of platform grandeur, so too some competition regulators appear to have fallen prey to the same malady. 

A vivid illustration is provided by the 2019 decision by the Competition Markets Authority (CMA), the British competition regulator, to challenge Amazon’s purchase of a 16% stake in Deliveroo, one of three major competitors in the British food-delivery services market. This intervention provides perhaps the clearest illustration of policy action based on a reflexive assumption of market power, even in the face of little to no indication that the predicate conditions for that assumption could plausibly be satisfied.

Far from being a dominant platform, Deliveroo was (and is) a money-losing venture lagging behind money-losing Just Eat (now Just Eat Takeaway) and Uber Eats in the U.K. food-delivery services market. Even Amazon had previously closed its own food-delivery service in the U.K. due to lack of profitability. Despite Deliveroo’s distressed economic circumstances and the implausibility of any market power arising from Amazon’s investment, the CMA nonetheless elected to pursue the fullest level of investigation. While the transaction was ultimately approved in August 2020, this intervention imposed a 15-month delay and associated costs in connection with an investment that almost certainly bolstered competition in a concentrated market by funding a firm reportedly at risk of insolvency.  This is the equivalent of a competition regulator driving in reverse.

Concluding Thoughts

There seems to be an increasingly common assumption in commentary by the press, policymakers, and even some scholars that apparently dominant platforms usually face little competition and can set, at will, the terms of exchange. For investors, this is a reason to buy; for regulators, this is a reason to intervene. This assumption is sometimes realized, and, in that case, antitrust intervention is appropriate whenever there is reasonable evidence that market power is being secured through something other than “competition on the merits.” However, several conditions must be met to support the market power assumption without which any such inquiry would be imprudent. Contrary to conventional wisdom, the economics and history of platform markets suggest that those conditions are infrequently satisfied.

Without closer scrutiny, reflexively equating market share with market power is prone to lead both investors and regulators astray.  

Antitrust by Fiat

Jonathan M. Barnett —  23 February 2021

The Competition and Antitrust Law Enforcement Reform Act (CALERA), recently introduced in the U.S. Senate, exhibits a remarkable willingness to cast aside decades of evidentiary standards that courts have developed to uphold the rule of law by precluding factually and economically ungrounded applications of antitrust law. Without those safeguards, antitrust enforcement is prone to be driven by a combination of prosecutorial and judicial fiat. That would place at risk the free play of competitive forces that the antitrust laws are designed to protect.

Antitrust law inherently lends itself to the risk of erroneous interpretations of ambiguous evidence. Outside clear cases of interfirm collusion, virtually all conduct that might appear anti-competitive might just as easily be proven, after significant factual inquiry, to be pro-competitive. This fundamental risk of a false diagnosis has guided antitrust case law and regulatory policy since at least the Supreme Court’s landmark Continental Television v. GTE Sylvania decision in 1977 and arguably earlier. Judicial and regulatory efforts to mitigate this ambiguity, while preserving the deterrent power of the antitrust laws, have resulted in the evidentiary requirements that are targeted by the proposed bill.

Proponents of the legislative “reforms” might argue that modern antitrust case law’s careful avoidance of enforcement error yields excessive caution. To relieve regulators and courts from having to do their homework before disrupting a targeted business and its employees, shareholders, customers and suppliers, the proposed bill empowers plaintiffs to allege and courts to “find” anti-competitive conduct without having to be bound to the reasonably objective metrics upon which courts and regulators have relied for decades. That runs the risk of substituting rhetoric and intuition for fact and analysis as the guiding principles of antitrust enforcement and adjudication.

This dismissal of even a rudimentary commitment to rule-of-law principles is illustrated by two dramatic departures from existing case law in the proposed bill. Each constitutes a largely unrestrained “blank check” for regulatory and judicial overreach.

Blank Check #1

The bill includes a broad prohibition on “exclusionary” conduct, which is defined to include any conduct that “materially disadvantages 1 or more actual or potential competitors” and “presents an appreciable risk of harming competition.” That amorphous language arguably enables litigants to target a firm that offers consumers lower prices but “disadvantages” less efficient competitors that cannot match that price.

In fact, the proposed legislation specifically facilitates this litigation strategy by relieving predatory pricing claims from having to show that pricing is below cost or likely to result ultimately in profits for the defendant. While the bill permits a defendant to escape liability by showing sufficiently countervailing “procompetitive benefits,” the onus rests on the defendant to show otherwise. This burden-shifting strategy encourages lagging firms to shift competition from the marketplace to the courthouse.

Blank Check #2

The bill then removes another evidentiary safeguard by relieving plaintiffs from always having to define a relevant market. Rather, it may be sufficient to show that the contested practice gives rise to an “appreciable risk of harming competition … based on the totality of the circumstances.” It is hard to miss the high degree of subjectivity in this standard.

This ambiguous threshold runs counter to antitrust principles that require a credible showing of market power in virtually all cases except horizontal collusion. Those principles make perfect sense. Market power is the gateway concept that enables courts to distinguish between claims that plausibly target alleged harms to competition and those that do not. Without a well-defined market, it is difficult to know whether a particular practice reflects market power or market competition. Removing the market power requirement can remove any meaningful grounds on which a defendant could avoid a nuisance lawsuit or contest or appeal a conclusory allegation or finding of anticompetitive conduct.

Anti-Market Antitrust

The bill’s transparently outcome-driven approach is likely to give rise to a cloud of liability that penalizes businesses that benefit consumers through price and quality combinations that competitors cannot replicate. This obviously runs directly counter to the purpose of the antitrust laws. Certainly, winners can and sometimes do entrench themselves through potentially anticompetitive practices that should be closely scrutinized. However, the proposed legislation seems to reflect a presumption that successful businesses usually win by employing illegitimate tactics, rather than simply being the most efficient firm in the market. Under that assumption, competition law becomes a tool for redoing, rather than enabling, competitive outcomes.

While this populist approach may be popular, it is neither economically sound nor consistent with a market-driven economy in which resources are mostly allocated through pricing mechanisms and government intervention is the exception, not the rule. It would appear that some legislators would like to reverse that presumption. Far from being a victory for consumers, that outcome would constitute a resounding loss.

In a constructive development, the Federal Trade Commission has joined its British counterpart in investigating Nvidia’s proposed $40 billion acquisition of chip designer Arm, a subsidiary of Softbank. Arm provides the technological blueprints for wireless communications devices and, subject to a royalty fee, makes those crown-jewel assets available to all interested firms. Notwithstanding Nvidia’s stated commitment to keep the existing policy in place, there is an obvious risk that the new parent, one of the world’s leading chip makers, would at some time modify this policy with adverse competitive effects.

Ironically, the FTC is likely part of the reason that the Nvidia-Arm transaction is taking place.

Since the mid-2000s, the FTC and other leading competition regulators (except for the U.S. Department of Justice’s Antitrust Division under the leadership of former Assistant Attorney General Makan Delrahim) have intervened extensively in licensing arrangements in wireless device markets, culminating in the FTC’s recent failed suit against Qualcomm. The Nvidia-Arm transaction suggests that these actions may simply lead chip designers to abandon the licensing model and shift toward structures that monetize chip-design R&D through integrated hardware and software ecosystems. Amazon and Apple are already undertaking chip innovation through this model. Antitrust action that accelerates this movement toward in-house chip design is likely to have adverse effects for the competitive health of the wireless ecosystem.

How IP Licensing Promotes Market Access

Since its inception, the wireless communications market has relied on a handful of IP licensors to supply device producers and other intermediate users with a common suite of technology inputs. The result has been an efficient division of labor between firms that specialize in upstream innovation and firms that specialize in production and other downstream functions. Contrary to the standard assumption that IP rights limit access, this licensing-based model ensures technology access to any firm willing to pay the royalty fee.

Efforts by regulators to reengineer existing relationships between innovators and implementers endanger this market structure by inducing innovators to abandon licensing-based business models, which now operate under a cloud of legal insecurity, for integrated business models in which returns on R&D investments are captured internally through hardware and software products. Rather than expanding technology access and intensifying competition, antitrust restraints on licensing freedom are liable to limit technology access and increase market concentration.

Regulatory Intervention and Market Distortion

This interventionist approach has relied on the assertion that innovators can “lock in” producers and extract a disproportionate fee in exchange for access. This prediction has never found support in fact. Contrary to theoretical arguments that patent owners can impose double-digit “royalty stacks” on device producers, empirical researchers have repeatedly found that the estimated range of aggregate rates lies in the single digits. These findings are unsurprising given market performance over more than two decades: adoption has accelerated as quality-adjusted prices have fallen and innovation has never ceased. If rates were exorbitant, market growth would have been slow, and the smartphone would be a luxury for the rich.

Despite these empirical infirmities, the FTC and other competition regulators have persisted in taking action to mitigate “holdup risk” through policy statements and enforcement actions designed to preclude IP licensors from seeking injunctive relief. The result is a one-sided legal environment in which the world’s largest device producers can effectively infringe patents at will, knowing that the worst-case scenario is a “reasonable royalty” award determined by a court, plus attorneys’ fees. Without any credible threat to deny access even after a favorable adjudication on the merits, any IP licensor’s ability to negotiate a royalty rate that reflects the value of its technology contribution is constrained.

Assuming no change in IP licensing policy on the horizon, it is therefore not surprising that an IP licensor would seek to shift toward an integrated business model in which IP is not licensed but embedded within an integrated suite of products and services. Or alternatively, an IP licensor entity might seek to be acquired by a firm that already has such a model in place. Hence, FTC v. Qualcomm leads Arm to Nvidia.

The Error Costs of Non-Evidence-Based Antitrust

These counterproductive effects of antitrust intervention demonstrate the error costs that arise when regulators act based on unverified assertions of impending market failure. Relying on the somewhat improbable assumption that chip suppliers can dictate licensing terms to device producers that are among the world’s largest companies, competition regulators have placed at risk the legal predicates of IP rights and enforceable contracts that have made the wireless-device market an economic success. As antitrust risk intensifies, the return on licensing strategies falls and competitive advantage shifts toward integrated firms that can monetize R&D internally through stand-alone product and service ecosystems.

Far from increasing competitiveness, regulators’ current approach toward IP licensing in wireless markets is likely to reduce it.

In the hands of a wise philosopher-king, the Sherman Act’s hard-to-define prohibitions of “restraints of trade” and “monopolization” are tools that will operate inevitably to advance the public interest in competitive markets. In the hands of real-world litigators, regulators and judges, those same words can operate to advance competitors’ private interests in securing commercial advantages through litigation that could not be secured through competition in the marketplace. If successful, this strategy may yield outcomes that run counter to antitrust law’s very purpose.

The antitrust lawsuit filed by Epic Games against Apple in August 2020, and Apple’s antitrust lawsuit against Qualcomm (settled in April 2019), suggest that antitrust law is heading in this unfortunate direction.

From rent-minimization to rent-maximization

The first step in converting antitrust law from an instrument to minimize rents to an instrument to maximize rents lies in expanding the statute’s field of application on the apparently uncontroversial grounds of advancing the public interest in “vigorous” enforcement. In surprisingly short order, this largely unbounded vision of antitrust’s proper scope has become the dominant fashion in policy discussions, at least as expressed by some legislators, regulators, and commentators.

Following the new conventional wisdom, antitrust law has pursued over the past decades an overly narrow path, consequently overlooking and exacerbating a panoply of social ills that extend well beyond the mission to “merely” protect the operation of the market pricing mechanism. This line of argument is typically coupled with the assertion that courts, regulators and scholars have been led down this path by incumbents that welcome the relaxed scrutiny of a purportedly deferential antitrust policy.

This argument, and related theory of regulatory capture, has things roughly backwards.

Placing antitrust law at the service of a largely undefined range of social purposes set by judicial and regulatory fiat threatens to render antitrust a tool that can be easily deployed to favor the private interests of competitors rather than the public interest in competition. Without the intellectual discipline imposed by the consumer welfare standard (and, outside of per se illegal restraints, operationalized through the evidentiary requirement of competitive harm), the rhetoric of antitrust provides excellent cover for efforts to re-engineer the rules of the game in lieu of seeking to win the game as it has been played.

Epic Games v. Apple

A nascent symptom of this expansive form of antitrust is provided by the much-publicized lawsuit brought by Epic Games, the maker of the wildly popular video game, Fortnite, against Apple, the operator of the even more wildly popular App Store. On August 13, 2020, Epic added a “direct” payment processing services option to its Fortnite game, which violated the developer terms of use that govern the App Store. In response, Apple exercised its contractual right to remove Fortnite from the App Store, triggering Fortnite’s antitrust suit. The same sequence has ensued between Epic Games and Google in connection with the Google Play Store. Both litigations are best understood as a breach of contract dispute cloaked in the guise of an antitrust cause of action.

In suggesting that a jury trial would be appropriate in Epic Games’ suit against Apple, the district court judge reportedly stated that the case is “on the frontier of antitrust law” and [i]t is important enough to understand what real people think.” That statement seems to suggest that this is a close case under antitrust law. I respectfully disagree. Based on currently available information and applicable law, Epic’s argument suffers from two serious vulnerabilities that would seem to be difficult for the plaintiff to overcome.

A contestably narrow market definition

Epic states three related claims: (1) Apple has a monopoly in the relevant market, defined as the App Store, (2) Apple maintains its monopoly by contractually precluding developers from distributing iOS-compatible versions of their apps outside the App Store, and (3) Apple maintains a related monopoly in the payment processing services market for the App Store by contractually requiring developers to use Apple’s processing service.

This market definition, and the associated chain of reasoning, is subject to significant doubt, both as a legal and factual matter.

Epic’s narrow definition of the relevant market as the App Store (rather than app distribution platforms generally) conveniently results in a 100% market share for Apple. Inconveniently, federal case law is generally reluctant to adopt single-brand market definitions. While the Supreme Court recognized in 1992 a single-brand market in Eastman Kodak Co. v. Image Technical Services, the case is widely considered to be an outlier in light of subsequent case law. As a federal district court observed in Spahr v. Leegin Creative Leather Products (E.D. Tenn. 2008): “Courts have consistently refused to consider one brand to be a relevant market of its own when the brand competes with other potential substitutes.”

The App Store would seem to fall into this typical category. The customer base of existing and new Fortnite users can still accessthe gamethrough multiple platforms and on multiple devices other than the iPhone, including a PC, laptop, game console, and non-Apple mobile devices. (While Google has also removed Fortnite from the Google Play store due to the added direct payment feature, users can, at some inconvenience, access the game manually on Android phones.)

Given these alternative distribution channels, it is at a minimum unclear whether Epic is foreclosed from reaching a substantial portion of its consumer base, which may already access the game on alternative platforms or could potentially do so at moderate incremental transaction costs. In the language of platform economics, it appears to be technologically and economically feasible for the target consumer base to “multi-home.” If multi-homing and related switching costs are low, even a 100% share of the App Store submarket would not translate into market power in the broader and potentially more economically relevant market for app distribution generally.

An implausible theory of platform lock-in

Even if it were conceded that the App Store is the relevant market, Epic’s claim is not especially persuasive, both as an economic and a legal matter. That is because there is no evidence that Apple is exploiting any such hypothetically attributed market power to increase the rents extracted from developers and indirectly impose deadweight losses on consumers.

In the classic scenario of platform lock-in, a three-step sequence is observed: (1) a new firm acquires a high market share in a race for platform dominance, (2) the platform winner is protected by network effects and switching costs, and (3) the entrenched platform “exploits” consumers by inflating prices (or imposing other adverse terms) to capture monopoly rents. This economic model is reflected in the case law on lock-in claims, which typically requires that the plaintiff identify an adverse change by the defendant in pricing or other terms after users were allegedly locked-in.

The history of the App Store does not conform to this model. Apple has always assessed a 30% fee and the same is true of every other leading distributor of games for the mobile and PC market, including Google Play Store, App Store’s rival in the mobile market, and Steam, the dominant distributor of video games in the PC market. This long-standing market practice suggests that the 30% fee is most likely motivated by an efficiency-driven business motivation, rather than seeking to entrench a monopoly position that Apple did not enjoy when the practice was first adopted. That is: even if Apple is deemed to be a “monopolist” for Section 2 purposes, it is not taking any “illegitimate” actions that could constitute monopolization or attempted monopolization.

The logic of the 70/30 split

Uncovering the business logic behind the 70/30 split in the app distribution market is not too difficult.

The 30% fee appears to be a low transaction-cost practice that enables the distributor to fund a variety of services, including app development tools, marketing support, and security and privacy protections, all of which are supplied at no separately priced fee and therefore do not require service-by-service negotiation and renegotiation. The same rationale credibly applies to the integrated payment processing services that Apple supplies for purposes of in-app purchases.

These services deliver significant value and would otherwise be difficult to replicate cost-effectively, protect the App Store’s valuable stock of brand capital (which yields positive spillovers for app developers on the site), and lower the costs of joining and participating in the App Store. Additionally, the 30% fee cross-subsidizes the delivery of these services to the approximately 80% of apps on the App Store that are ad-based and for which no fee is assessed, which in turn lowers entry costs and expands the number and variety of product options for platform users. These would all seem to be attractive outcomes from a competition policy perspective.

Epic’s objection

Epic would object to this line of argument by observing that it only charges a 12% fee to distribute other developers’ games on its own Epic Games Store.

Yet Epic’s lower fee is reportedly conditioned, at least in some cases, on the developer offering the game exclusively on the Epic Games Store for a certain period of time. Moreover, the services provided on the Epic Games Store may not be comparable to the extensive suite of services provided on the App Store and other leading distributors that follow the 30% standard. Additionally, the user base a developer can expect to access through the Epic Games Store is in all likelihood substantially smaller than the audience that can be reached through the App Store and other leading app and game distributors, which is then reflected in the higher fees charged by those platforms.

Hence, even the large fee differential may simply reflect the higher services and larger audiences available on the App Store, Google Play Store and other leading platforms, as compared to the Epic Games Store, rather than the unilateral extraction of market rents at developers’ and consumers’ expense.

Antitrust is about efficiency, not distribution

Epic says the standard 70/30 split between game publishers and app distributors is “excessive” while others argue that it is historically outdated.

Neither of these are credible antitrust arguments. Renegotiating the division of economic surplus between game suppliers and distributors is not the concern of antitrust law, which (as properly defined) should only take an interest if either (i) Apple is colluding on the 30% fee with other app distributors, or (ii) Apple is taking steps that preclude entry into the apps distribution market and lack any legitimate business justification. No one claims evidence for the former possibility and, without further evidence, the latter possibility is not especially compelling given the uniform use of the 70/30 split across the industry (which, as noted, can be derived from a related set of credible efficiency justifications). It is even less compelling in the face of evidence that output is rapidly accelerating, not declining, in the gaming app market: in the first half of 2020, approximately 24,500 new games were added to the App Store.

If this conclusion is right, then Epic’s lawsuit against Apple does not seem to have much to do with the public interest in preserving market competition.

But it clearly has much to do with the business interest of an input supplier in minimizing its distribution costs and maximizing its profit margin. That category includes not only Epic Games but Tencent, the world’s largest video game publisher and the holder of a 40% equity stake in Epic. Tencent also owns Riot Games (the publisher of “League of Legends”), an 84% stake in Supercell (the publisher of “Clash of Clans”), and a 5% stake in Activision Blizzard (the publisher of “Call of Duty”). It is unclear how an antitrust claim that, if successful, would simply redistribute economic value from leading game distributors to leading game developers has any necessary relevance to antitrust’s objective to promote consumer welfare.

The prequel: Apple v. Qualcomm

Ironically (and, as Dirk Auer has similarly observed), there is a symmetry between Epic’s claims against Apple and the claims previously pursued by Apple (and, concurrently, the Federal Trade Commission) against Qualcomm.

In that litigation, Apple contested the terms of the licensing arrangements under which Qualcomm made available its wireless communications patents to Apple (more precisely, Foxconn, Apple’s contract manufacturer), arguing that the terms were incompatible with Qualcomm’s commitment to “fair, reasonable and nondiscriminatory” (“FRAND”) licensing of its “standard-essential” patents (“SEPs”). Like Epic v. Apple, Apple v. Qualcomm was fundamentally a contract dispute, with the difference that Apple was in the position of a third-party beneficiary of the commitment that Qualcomm had made to the governing standard-setting organization. Like Epic, Apple sought to recharacterize this contractual dispute as an antitrust question, arguing that Qualcomm’s licensing practices constituted anticompetitive actions to “monopolize” the market for smartphone modem chipsets.

Theory meets evidence

The rhetoric used by Epic in its complaint echoes the rhetoric used by Apple in its briefs and other filings in the Qualcomm litigation. Apple (like the FTC) had argued that Qualcomm imposed a “tax” on competitors by requiring that any purchaser of Qualcomm’s chipsets concurrently enter into a license for Qualcomm’s SEP portfolio relating to 3G and 4G/LTE-enabled mobile communications devices.

Yet the history and performance of the mobile communications market simply did not track Apple’s (and the FTC’s continuing) characterization of Qualcomm’s licensing fee as a socially costly drag on market growth and, by implication, consumer welfare.

If this assertion had merit, then the decades-old wireless market should have exhibited a dismal history of increasing prices, slow user adoption and lagging innovation. In actuality, the wireless market since its inception has grown relentlessly, characterized by declining quality-adjusted prices, expanding output, relentless innovation, and rapid adoption across a broad range of income segments.

Given this compelling real-world evidence, the only remaining line of argument (still being pursued by the FTC) that could justify antitrust intervention is a theoretical conjecture that the wireless market might have grown even faster under some alternative IP licensing arrangement. This assertion rests precariously on the speculative assumption that any such arrangement would have induced the same or higher level of aggregate investment in innovation and commercialization activities. That fragile chain of “what if” arguments hardly seems a sound basis on which to rewrite the legal infrastructure behind the billions of dollars of licensing transactions that support the economically thriving smartphone market and the even larger ecosystem that has grown around it.

Antitrust litigation as business strategy

Given the absence of compelling evidence of competitive harm from Qualcomm’s allegedly anticompetitive licensing practices, Apple’s litigation would seem to be best interpreted as an economically rational attempt by a downstream producer to renegotiate a downward adjustment in the fees paid to an upstream supplier of critical technology inputs. (In fact, those are precisely the terms on which Qualcomm in 2015 settled the antitrust action brought against it by China’s competition regulator, to the obvious benefit of local device producers.) The Epic Games litigation is a mirror image fact pattern in which an upstream supplier of content inputs seeks to deploy antitrust law strategically for the purposes of minimizing the fees it pays to a leading downstream distributor.

Both litigations suffer from the same flaw. Private interests concerning the division of an existing economic value stream—a business question that is matter of indifference from an efficiency perspective—are erroneously (or, at least, reflexively) conflated with the public interest in preserving the free play of competitive forces that maximizes the size of the economic value stream.

Conclusion: Remaking the case for “narrow” antitrust

The Epic v. Apple and Apple v. Qualcomm disputes illustrate the unproductive rent-seeking outcomes to which antitrust law will inevitably be led if, as is being widely advocated, it is decoupled from its well-established foundation in promoting consumer welfare—and not competitor welfare.

Some proponents of a more expansive approach to antitrust enforcement are convinced that expanding the law’s scope of application will improve market efficiency by providing greater latitude for expert regulators and courts to reengineer market structures to the public benefit. Yet any substitution of top-down expert wisdom for the bottom-up trial-and-error process of market competition can easily yield “false positives” in which courts and regulators take actions that counterproductively intervene in markets that are already operating under reasonably competitive conditions. Additionally, an overly expansive approach toward the scope of antitrust law will induce private firms to shift resources toward securing advantages over competitors through lobbying and litigation, rather than seeking to win the race to deliver lower-cost and higher-quality products and services. Neither outcome promotes the public’s interest in a competitive marketplace.

In an age of antitrust populism on both ends of the political spectrum, federal and state regulators face considerable pressure to deploy the antitrust laws against firms that have dominant market shares. Yet federal case law makes clear that merely winning the race for a market is an insufficient basis for antitrust liability. Rather, any plaintiff must show that the winner either secured or is maintaining its dominant position through practices that go beyond vigorous competition. Any other principle would inhibit the competitive process that the antitrust laws are designed to promote. Federal judges who enjoy life tenure are far more insulated from outside pressures and therefore more likely to demand evidence of anticompetitive practices as a predicate condition for any determination of antitrust liability.

This separation of powers between the executive branch, which prosecutes alleged infractions of the law, and the judicial branch, which polices the prosecutor, is the simple genius behind the divided system of government generally attributed to the eighteenth-century French thinker, Montesquieu. The practical wisdom of this fundamental principle of political design, which runs throughout the U.S. Constitution, can be observed in full force in the current antitrust landscape, in which the federal courts have acted as a bulwark against several contestable enforcement actions by antitrust regulators.

In three headline cases brought by the Department of Justice or the Federal Trade Commission since 2017, the prosecutorial bench has struck out in court. Under the exacting scrutiny of the judiciary, government litigators failed to present sufficient evidence that a dominant firm had engaged in practices that caused, or were likely to cause, significant anticompetitive effects. In each case, these enforcement actions, applauded by policymakers and commentators who tend to follow “big is bad” intuitions, foundered when assessed in light of judicial precedent, the factual record, and the economic principles embedded in modern antitrust law. An ongoing suit, filed by the FTC this year after more than 18 months since the closing of the targeted acquisition, exhibits similar factual and legal infirmities.

Strike 1: The AT&T/Time-Warner Transaction

In response to the announcement of AT&T’s $85.4 billion acquisition of Time Warner, the DOJ filed suit in 2017 to prevent the formation of a dominant provider in home-video distribution that would purportedly deny competitors access to “must-have” content. As I have observed previously, this theory of the case suffered from two fundamental difficulties. 

First, content is an abundant and renewable resource so it is hard to see how AT&T+TW could meaningfully foreclose competitors’ access to this necessary input. Even in the hypothetical case of potentially “must-have” content, it was unclear whether it would be economically rational for post-acquisition AT&T regularly to deny access to other distributors, given that doing so would imply an immediate and significant loss in licensing revenues without any clearly offsetting future gain in revenues from new subscribers.

Second, home-video distribution is a market lapsing rapidly into obsolescence as content monetization shifts from home-based viewing to a streaming environment in which consumers expect “anywhere, everywhere” access. The blockbuster acquisition was probably best understood as a necessary effort to adapt to this new environment (already populated by several major streaming platforms), rather than an otherwise puzzling strategy to spend billions to capture a market on the verge of commercial irrelevance. 

Strike 2: The Sabre/Farelogix Acquisition

In 2019, the DOJ filed suit to block the $360 million acquisition of Farelogix by Sabre, one of three leading airline booking platforms, on the ground that it would substantially lessen competition. The factual basis for this legal diagnosis was unclear. In 2018, Sabre earned approximately $3.9 billion in worldwide revenues, compared to $40 million for Farelogix. Given this drastic difference in market share, and the almost trivial share attributable to Farelogix, it is difficult to fathom how the DOJ could credibly assert that the acquisition “would extinguish a crucial constraint on Sabre’s market power.” 

To use a now much-discussed theory of antitrust liability, it might nonetheless be argued that Farelogix posed a “nascent” competitive threat to the Sabre platform. That is: while Farelogix is small today, it may become big enough tomorrow to pose a threat to Sabre’s market leadership. 

But that theory runs straight into a highly inconvenient fact. Farelogix was founded in 1998 and, during the ensuing two decades, had neither achieved broad adoption of its customized booking technology nor succeeded in offering airlines a viable pathway to bypass the three major intermediary platforms. The proposed acquisition therefore seems best understood as a mutually beneficial transaction in which a smaller (and not very nascent) firm elects to monetize its technology by embedding it in a leading platform that seeks to innovate by acquisition. Robust technology ecosystems do this all the time, efficiently exploiting the natural complementarities between a smaller firm’s “out of the box” innovation with the capital-intensive infrastructure of an incumbent. (Postscript: While the DOJ lost this case in federal court, Sabre elected in May 2020 not to close following similarly puzzling opposition by British competition regulators.) 

Strike 3: FTC v. Qualcomm

The divergence of theories of anticompetitive risk from market realities is vividly illustrated by the landmark suit filed by the FTC in 2017 against Qualcomm. 

The litigation pursued nothing less than a wholesale reengineering of the IP licensing relationships between innovators and implementers that underlie the global smartphone market. Those relationships principally consist of device-level licenses between IP innovators such as Qualcomm and device manufacturers and distributors such as Apple. This structure efficiently collects remuneration from the downstream segment of the supply chain for upstream firms that invest in pushing forward the technology frontier. The FTC thought otherwise and pursued a remedy that would have required Qualcomm to offer licenses to its direct competitors in the chip market and to rewrite its existing licenses with device producers and other intermediate users on a component, rather than device, level. 

Remarkably, these drastic forms of intervention into private-ordering arrangements rested on nothing more than what former FTC Commissioner Maureen Ohlhausen once appropriately called a “possibility theorem.” The FTC deployed a mostly theoretical argument that Qualcomm had extracted an “unreasonably high” royalty that had potentially discouraged innovation, impeded entry into the chip market, and inflated retail prices for consumers. Yet these claims run contrary to all available empirical evidence, which indicates that the mobile wireless device market has exhibited since its inception declining quality-adjusted prices, increasing output, robust entry into the production market, and continuous innovation. The mismatch between the government’s theory of market failure and the actual record of market success over more than two decades challenges the policy wisdom of disrupting hundreds of existing contractual arrangements between IP licensors and licensees in a thriving market. 

The FTC nonetheless secured from the district court a sweeping order that would have had precisely this disruptive effect, including imposing a “duty to deal” that would have required Qualcomm to license directly its competitors in the chip market. The Ninth Circuit stayed the order and, on August 11, 2020, issued an unqualified reversal, stating that the lower court had erroneously conflated “hypercompetitive” (good) with anticompetitive (bad) conduct and observing that “[t]hroughout its analysis, the district court conflated the desire to maximize profits with an intent to ‘destroy competition itself.’” In unusually direct language, the appellate court also observed (as even the FTC had acknowledged on appeal) that the district court’s ruling was incompatible with the Supreme Court’s ruling in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., which strictly limits the circumstances in which a duty to deal can be imposed. In some cases, it appears that additional levels of judicial review are necessary to protect antitrust law against not only administrative but judicial overreach.

Axon v. FTC

For the most explicit illustration of the interface between Montesquieu’s principle of divided government and the risk posed to antitrust law by cases of prosecutorial excess, we can turn to an unusual and ongoing litigation, Axon v. FTC.

The HSR Act and Post-Consummation Merger Challenges

The HSR Act provides regulators with the opportunity to preemptively challenge acquisitions and related transactions on antitrust grounds prior to those transactions having been consummated. Since its enactment in 1976, this statutory innovation has laudably increased dealmakers’ ability to close transactions with a high level of certainty that regulators would not belatedly seek to “unscramble the egg.” While the HSR Act does not foreclose this contingency since regulatory failure to challenge a transaction only indicates current enforcement intentions, it is probably fair to say that M&A dealmakers generally assume that regulators would reverse course only in exceptional circumstances. In turn, the low prospect of after-the-fact regulatory intervention encourages the efficient use of M&A transactions for the purpose of shifting corporate assets to users that value those assets most highly.

The FTC’s Belated Attack on the Axon/Vievu Acquisition

Dealmakers may be revisiting that understanding in the wake of the FTC’s decision in January 2020 to challenge the acquisition of Vievu by Axon, each being a manufacturer of body-worn camera equipment and related data-management software for law enforcement agencies. The acquisition had closed in May 2018 but had not been reported through HSR since it fell well below the reportable deal threshold. Given a total transaction value of $7 million, the passage of more than 18 months since closing, and the insolvency or near-insolvency of the target company, it is far from obvious that the Axon acquisition posed a material competitive risk that merits unsettling expectations that regulators will typically not challenge a consummated transaction, especially in the case of what is a micro-sized nebula in the M&A universe. 

These concerns are heightened by the fact that the FTC suit relies on a debatably narrow definition of the relevant market (body-camera equipment and related “cloud-based” data management software for police departments in large metropolitan areas, rather than a market that encompassed more generally defined categories of body-worn camera equipment, law enforcement agencies, and data management services). Even within this circumscribed market, there are apparently several companies that offer related technologies and an even larger group that could plausibly enter in response to perceived profit opportunities. Despite this contestable legal position, Axon’s court filing states that the FTC offered to settle the suit on stiff terms: Axon must agree to divest itself of the Vievu assets and to license all of Axon’s pre-transaction intellectual property to the buyer of the Vievu assets. This effectively amounts to an opportunistic use of the antitrust merger laws to engage in post-transaction market reengineering, rather than merely blocking an acquisition to maintain the pre-transaction status quo.

Does the FTC Violate the Separation of Powers?

In a provocative strategy, Axon has gone on the offensive and filed suit in federal district court to challenge on constitutional grounds the long-standing internal administrative proceeding through which the FTC’s antitrust claims are initially adjudicated. Unlike the DOJ, the FTC’s first stop in the litigation process (absent settlement) is not a federal district court but an internal proceeding before an administrative law judge (“ALJ”), whose ruling can then be appealed to the Commission. Axon is effectively arguing that this administrative internalization of the judicial function violates the separation of powers principle as implemented in the U.S. Constitution. 

Writing on a clean slate, Axon’s claim is eminently reasonable. The fact that FTC-paid personnel sit on both sides of the internal adjudicative process as prosecutor (the FTC litigation team) and judge (the ALJ and the Commissioners) locates the executive and judicial functions in the hands of a single administrative entity. (To be clear, the Commission’s rulings are appealable to federal court, albeit at significant cost and delay.) In any event, a court presented with Axon’s claim—as of this writing, the Ninth Circuit (taking the case on appeal by Axon)—is not writing on a clean slate and is most likely reluctant to accept a claim that would trigger challenges to the legality of other similarly structured adjudicative processes at other agencies. Nonetheless, Axon’s argument does raise important concerns as to whether certain elements of the FTC’s adjudicative mechanism (as distinguished from the very existence of that mechanism) could be refined to mitigate the conflicts of interest that arise in its current form.


Antitrust vigilance certainly has its place, but it also has its limits. Given the aspirational language of the antitrust statutes and the largely unlimited structural remedies to which an antitrust litigation can lead, there is an inevitable risk of prosecutorial overreach that can betray the fundamental objective to protect consumer welfare. Applied to the antitrust context, the separation of powers principle mitigates this risk by subjecting enforcement actions to judicial examination, which is in turn disciplined by the constraints of appellate review and stare decisis. A rich body of federal case law implements this review function by anchoring antitrust in a decisionmaking framework that promotes the public’s interest in deterring business practices that endanger the competitive process behind a market-based economy. As illustrated by the recent string of failed antitrust suits, and the ongoing FTC litigation against Axon, that same decisionmaking framework can also protect the competitive process against regulatory practices that pose this same type of risk.